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BIG PROFITS, RISKS WITH INCENTIVE FEES; BUT FEW MOURN PASSING OF THE ONCE-STANDARD 15% COMMISSION

Now that the funeral for the 15% commission system is official, agencies must work harder to customize their compensation structures and find new ways of redefining their role in brand building.

The Association of National Advertisers' "1995 ANA Trends in Agency Compensation" study revealed last week that only 14% of advertisers still use 15% commission-based payments, and agencies are increasingly moving toward labor fee and incentive-based setups.

Indeed, some agencies that fought tooth and nail against the death of the once-standard 15% commission are finding that incentive-based programs are better for their profit margins. According to the ANA survey, some 45% of agencies are merely getting reduced-rate commissions.

The survey was compiled from questionnaires sent to ANA members and returned by December of last year.

"We should find ways to be compensated for our core competency in brand-building communications instead of how much media we can buy," said Keith Reinhard, chairman-CEO at DDB Needham Worldwide, New York. "We need a results-based program agreed to by the client and agency so everybody knows what they should be expecting and there's no arguing over how many ads you run."

But some agency executives, though open to incentive-based programs, said they have pitfalls too. One executive told of how, when his agency prospered under a results-based program one year, the client upped the ante the following year, making it harder to reap the same profits.

What's more, clients are still most comfortable with the commission system, according to the survey. Some 59% of the advertisers, mostly large advertisers, favor some form of the commission system because of its simplicity. Bruce Wilson, Eastman Kodak Co.'s director of brand communications for digital and applied imaging and chairman of the ANA's financial management committee, said the incentive-based system is very hard to manage with large advertisers like a Kodak, Procter & Gamble Co. or General Motors Corp.

But the status quo, warned agencies and consultants alike, isn't in the best interest of either agency or client. Some agencies, such as Saatchi & Saatchi Advertising Worldwide, have revised their hierarchical structures to increase efficiency.

"Historically, an agency could be the center for 10 different careers, from media to research," said Michael Jeary, chairman-CEO of Saatchi & Saatchi Advertising. "Now we have people playing many roles and retraining so that we don't just have a bunch of specialists."

What represents a fair return for an agency is, not surprisingly, a matter for debate. The American Association of Advertising Agencies President-CEO O. Burtch Drake puts the number at a 20% to 25% pretax profit.

Mr. Wilson countered: "I don't necessarily subscribe to the 20% figure. Most advertisers would be delighted to get a 20% profit before tax. If a client is making a 10% to 12% pretax profit, it's not unreasonable to ask the agency to make the same."